Regarding the FOMC, we will see the end to the QE program with another 15bn taper. Discussion around considerable time might arise, however given current market pricing (via FF futures and EDs) it is expected that we have another 11 months until the 1st rate hike.
The problem is that the US economy is getting to the point where a rate hike is sensible, no matter how we put it, the recent risks that have developed in the past few months will likely (and hopefully) reside. Whether they be risks from China or Europe, they don't seem enough to really put of US hikes.
However, there is no escaping the fact that Yellen really doesn't want to hike, and there have been a few timely excuses that she will use to push back expectations. Namely weakness in oil prices leading to a drop in inflation expectations, however long term expectations have dropped only marginally. The ECB apparently loves the 5y5y measure, yet I am sure the Fed will forget to mention that long term inflation expectations are stable (ish), but will focus on shorter inflation swaps.
|5y5y inflation expectations|
|Mankiw's estimate for Taylor rule|
It is worth bearing in mind the next couple of charts...
|EURUSD against 2 year swap spread|
|US 2 year govt bond yield|
After the other weeks crazy rates move, US 2's have stabilised, yet are way below where they were, I prefer paying US rates, and shorting the USD, it offers a better risk:reward, and is hedged somewhat into FOMC.
On to the RBNZ and the NZD now... the 90 day bank bill futures see the next hike about 6 months away, however I would be more unsure about that. With NZ's Terms of trade plummeting (milk, innit) and a further slowing down in China, the RBNZ will be hesitant to hike further, and may even be regretting the recent 100bp move given the last CPI print. Either way, hikes are off the table, and it's very likely we don't see another RBNZ hike before the Fed.
|90 day bank bill futures curve, now / 1m ago /3mago|
|NZD vs carry/vol|
Here we can see the impact clearly with Carry/vol (1y1y / FX vol). Furthermore, given risks to short run outlooks we should see a pick up in vol further, and combining this with lower NZD rates, the NZD is likely to under perform.
Next up... Brazil, and we have some elections! now I know very little about these, as I haven't been following. But Dilma Rousseff is probably going to win given recent pollings, and options markets have moved accordingly with a sizeable mark up in vols, and 1 weeks still around 40 (as of friday)
|USDBRL 1 week ATM vol|
The vol surface is interesting too, with very little skew between puts and calls, which is quite odd around risk events!
|BRL vol surface|
$BRL had gone from being the best performing ccy (carry adjusted) for the year just two months ago, to barely even flat. The sharp sell-off has led some banks to suggest buying, given the "oversold" nature of the BRL currently and the high implied yield from NDFs (just shy of 10%)
However, BRL and BRL options are outside of my investable universe, so I'm just watching, but it's interesting nonetheless.
In $RUB, we are starting to get into that area where I'm going to start looking at the RUB in a constructive way... Implied have spiked higher with 3m ATMs at 15, with 25d riskies at 5. With the RUB firmly in the intervention zone for the Central bank and with plenty of firepower I would expect the large sell-off to start to slow down.
|USDRUB and 2 year swaps top pane, vol and rr's in bottom|
|RUB 1y xccy basis|
Looking at the basis, the $ liquidity problems are still firmly about, however it is starting to come off a little which should take away from the local demand for $'s
Anyway, just some quick thoughts. Have a good week.